Fiscal economics

Fiscal economics is foremost a delicate high-wire act. Even the slightest move can unbalance everything. Thus, detrimental ramifications were expected to arise from the Bank of Israel’s decision Monday to lower interest rates.

Lower interest was all but unavoidable against a global backdrop of rock bottom rates, lest the shekel again lure foreign investors/speculators. This in turn would overvalue it and render our exports too expensive and unable to compete internationally. The results could lead to loss of markets, business failures and massive layoffs. Hence interest rates must occasionally be readjusted.

But while lower rates might discourage currency speculators, they beckon other players. Foremost they make mortgages more affordable, helping further pump up the already engorged real estate bubble. If unchecked, this can trigger something akin to what Fannie Mae and Freddie Mac wrought in America five years ago, a crisis from which the world hasn’t truly recovered.

A profligate mortgage policy can destabilize the banks and with them the entire financial underpinning of the economy.

The fact that it has been getting significantly easier to obtain mortgages in Israel enticed many to take out whopping ones by local standards. The danger is that many of the borrowers may be getting in way over their heads. They may lack the wherewithal to ensure they can keep up monthly payments. Down the line this could adversely impact the resilience of our banks, which need to amass the capital to secure the mortgages they offer.

To preempt trouble BOI governor Stanley Fischer announced new loan-to-value limitations on mortgages.

Up until this week it was possible to purchase a NIS1.5 million flat for only 10 percent down. Such hefty 90% mortgages would no longer be available to anyone. This isn’t hardheartedness, but an attempt to manage the real estate fever before it soars out of control.

Moreover, a socially-conscious differentiation was made among the several types of mortgage applicants. First-time home-buyers can still receive a 75% mortgage. Families upgrading their accommodations are eligible for 70%, but investors – including overseas buyers – who are acquiring the real estate not for their own residence, will not be entitled to more than 50%.

The latter category of real estate purchasers – as distinct from home-buyers – account for over 25% of all real estate transactions in this country and their numbers are growing, thereby sending prices spiraling upwards.

By this past August Israeli banks had loaned almost NIS 6 billion in mortgages – nearly NIS 800m. of it to investors. Indeed, investors have been buying up property like hotcakes, and statistics show that at least 20% of them have been reselling the newly bought properties within six months of purchase, raking in massive profits despite high taxes. Because of the tempting mortgage offers, these operators don’t need to put much of their own capital down.

We don’t begrudge anyone’s money-making success, but such wheeling and dealing inevitably pushes real estate prices sky high for everyone. The culprit that overheats the housing market is low interest and the consequent attractiveness of mortgages. This is a worrying departure from what was once common here.

Not too many years back, Israeli young couples took relatively small mortgages and gravitated away from trendy hubs. Today they hanker after city-centers and take out gargantuan mortgages. Once, a mortgage whose value reached 30% of an apartment’s cost, seemed excessive.

Today two-thirds seems minimal. A 15-year mortgage was long by yesteryear’s criteria. Today 25 years aren’t unusual.

Israelis might not be overextending themselves quite as grotesquely as their American counterparts, but they are fast headed in that general direction. Massive mortgages were hitherto unknown in Israel. Ours, after all, was a country in which mortgage-lenders were traditionally tightfisted and ultra-regulated. It was never simple to obtain a mortgage, especially a hyper-sized one.

This isn’t only the exclusive concern of eager banks and impulsive clients. The country’s economic wellbeing hangs in the balance. The BOI consequently deserves unstinting support for at least trying to break the vicious cycle of rising real estate prices and low interest rates. In combination, these are the classic ingredients for a crisis.